Question

1. ) A company has a marginal cost of equity at 14.55%, while it pays a dividend of 11% on its preferred stock, with an interest payout on a per bond basis of $75.95 annually on a semi-annual basis. The company is 59% equity (common stock) funded, and 12% funded by preferred stock. The applicable corporate tax rate is 25%. Please find the WACC of this company.

Answer 1

Assuming bond face value to be $1,000

Interest rate on the bond

= Annual coupon / Face value x 100

= $75.95 / $1,000 x 100

= 7.60%

After tax cost of debt

= Interest rate x (1 – tax rate)

= 7.60 x (1 – 0.25)

= 5.70%

Weight of bond in the portfolio

= Total weight – Weight of equity – Weight of preferred stock

= 100 – 59 – 12

= 29%

Cost of equity and weight of equity are 14.55% and 59%

Cost of preferred stock and weight are 11% and 12%

So, weight average cost of capital

= Sum of product of respective weights with respective costs

= Weight of debt x Cost of debt + Weight of equity x Cost of equity + Weight of preferred stock x Cost of preferred stock

= 0.29 x 5.70 + 0.59 x 14.55 + 0.12 x 11

= 1.65 + 8.58 + 1.32

= 11.55%